Gotham Products is a price-taker and uses target pricing.Gotham has just done an analysis of their revenues,costs and desired profits,and has calculated its target full product cost.Refer to the following information:
$$\begin{array} { | l | l | l | }
\hline \text { Target full product cost } & \$ 520,000 & \text { per year } \
\hline \text { Actual fixed cost } & \$ 281,000 & \text { per year } \
\hline \text { Actual variable cost } & \$ 2 & \text { per unit } \
\hline \text { Production volume } & 152,000 & \text { units per year } \
\hline
\end{array}$$
Actual costs are currently higher than target full product cost.Assuming that fixed costs cannot be reduced,how much is the target variable cost per unit?

Question

Gotham Products is a price-taker and uses target pricing.Gotham has just done an analysis of their revenues,costs and desired profits,and has calculated its target full product cost.Refer to the following information:
$$\begin{array} { | l | l | l | } 
\hline \text { Target full product cost } & \$ 520,000 & \text { per year } \
\hline \text { Actual fixed cost } & \$ 281,000 & \text { per year } \
\hline \text { Actual variable cost } & \$ 2 & \text { per unit } \
\hline \text { Production volume } & 152,000 & \text { units per year } \
\hline
\end{array}$$
Actual costs are currently higher than target full product cost.Assuming that fixed costs cannot be reduced,how much is the target variable cost per unit?

Quizplus · Accepted Answer

In target pricing, the company sets its price based on the customers' perceived value and then calculates the target full product cost. Since Gotham is a price-taker, it cannot increase its price to cover the higher actual costs. Therefore, it needs to reduce its variable cost per unit to match the target full product cost. 
Variable cost per unit = (Target full product cost - Fixed cost) / Number of units
We do not have information about the fixed cost and the number of units, so we cannot determine the exact variable cost per unit. However, we know that it needs to be lower than the current actual cost per unit.
Out of the given choices, the only option lower than the current actual cost per unit is B) $1.57, so it is the best choice.

Gotham Products Is a Price-Taker and Uses Target Pricing Actual Costs Are Currently Higher Than Target Full Product Cost